In this article you will find everything about liquidity planning. What is behind the word liquidity plan, how to create a liquidity plan, what templates are available, examples of planning, etc.
Liquidity and liquidity planning have been with me for 20 years now, at all stages of my career. From finance assistant to CFO, with the responsibility of ensuring the liquidity of the company. If something is missing or a question is not answered, please let me know directly at firstname.lastname@example.org!
Why liquidity planning?
Nothing compares to the importance that the topic of liquidity has in small and medium-sized enterprises. Because the options for action in the event of liquidity bottlenecks in small companies are severely limited compared to large companies. And unfortunately, far too often the need for action is only recognised very late.
Who does not know it? Urgent vs. Important!
Figure: Imbalance of urgent vs. important tasks in the area of liquidity
As a rule, the options for action to overcome a liquidity bottleneck are then limited to three things:
- external financing by the (house) bank,
- Waiver of withdrawals
- Financing by owners
Wait a minute! And what about the utilisation of payment terms with suppliers or possibilities of advance payments from customers? When thinking about these things, it is urgent to check the basic solvency of the company. But I will come to that later.
The liquidity plan
The liquidity plan or liquidity calculation determines the future cash flows of a company, i.e. it compares the expected income with the expected expenditure in a systematic form. The systematic form refers to the planning template used. The template depends on the requirements of the enterprise or entrepreneur. The expected cash flows, i.e. income and expenditure, can be defined in different ways.
- In the case of transactions that have already taken place, these are referred to as deposits or withdrawals.
- In the actual definition, additional "open items" are understood, i.e. those already existing outgoing or incoming invoices that have not yet been paid.
- In an extended definition used in planning, this is also expected income and expenditure over a longer period of time without underlying invoices. Often these expected receipts and payments are derived from a financial plan.
Receipts and payments as well as expenditures and disbursements are often used synonymously. However, this is also the time to clarify some important conceptual differences.
So what is a liquidity statement?
Liquidity accounting, a synonym for liquidity planning, determines the future cash flows of a company and compares them in a systematic form.
Cash flows: receipts vs. revenues or payments vs. expenses
In the case of payment flows, there is often a mixture of different terms. Revenues / expenses are terms from double-entry accounting. For revenues or expenses, it is irrelevant whether an incoming payment or a payment has already been made.
Deposits/disbursements are terms from liquidity planning and are very easy to identify: Has there been a movement in the account? If yes, then it is a deposit or a disbursement.
All terms can be assigned to the subject area of financial accounting. The main difference is the result obtained. Even the search with Google is not trivial.
We have found a very good presentation on Rechnungswesen-info.de:
Fig: Definitions of terms in financial accounting (and cost accounting)
This table also mentions the term expenditure and income. These are broader technical terms in liquidity planning and, in addition to the actual transactions, also include the open items, i.e. expenditures or revenues that are not yet disbursements or receipts.
Objective of the liquidity plan
The liquidity plan has the task of showing the future, available liquid funds of a company, i.e. the liquidity stock on a certain day. In other words: How much money will be available to the company in 3 weeks, 3 months, 12 months, on a certain day, etc.? Classic questions to be answered with the help of a liquidity plan are:
- Can I afford an additional employee?
- Can I pre-finance a big project? (Do I have the "breath" for it?)
- Can I repay a loan due on day xx. or do I have to refinance?
The overriding objective is to ensure and monitor solvency at all times. This is one of the most important tasks of an entrepreneur, cannot be delegated and, if ignored, even has consequences under criminal law (key words: going concern forecast, negligence, delaying insolvency).
I would even go so far: A financial plan is optional, but liquidity planning is compulsory.
Stop! Finance plan again? Before we go any further, we should first define some important terms or work out the differences.
Finance plan vs. liquidity plan
The financial plan of a company compares the expected revenues of a company with the expected expenses in a period and aims to determine the profit. The core of a financial plan is a planned profit and loss account or planned P&L for a specific period, usually a business year. The plan P&L is often accompanied by subsidiary calculations or detailed planning, such as turnover planning, an investment calculation, financing planning and personnel planning.
In larger companies, the finance plan is also divided into (business) areas or cost centres. In a more or less complex form, there may also be a subsidiary calculation for taxes on income. Actually, the budgeted balance sheet would also be part of a financial plan. In practice, however, it is often neglected and replaced by the above-mentioned subsidiary calculations.
There is a good reason for this. The financial plan maps the accounting of a period. The preparation of a budgeted balance sheet would therefore be equivalent to the preparation of financial statements (by a tax advisor). And since accounting is a closed cycle and many financial plans are made in Excel, the Excel planner's greatest enemy arises with a budgeted balance sheet: circular reference!
This necessary attention to detail and complexity have led in practice to the fact that the preparation of the budgeted balance sheet is often dispensed with.
The financial plan is always prepared at the time of foundation and then at least annually (period). In larger companies and groups, financial planning is done several times a year in planning cycles. Our friends at Billomat - those who love accounting - have written a short article on the subject of the financial plan that is well worth reading:
So, what are the differences between a finance plan and a liquidity plan?
And on it goes ...
Business plan vs. finance plan
The business plan is, so to speak, the broadest term in the field of planning. A fully comprehensive business plan is usually drawn up when a company is founded and has two groups of recipients:
- internal - the founding team
- External - funding agencies, investors
A business plan also consists of a variety of qualitative and quantitative elements:
- Executive Summary
- Personal data of the founders
- Presentation of the product or service idea
- Customer description and marketing planning
- Description of the competition
- Presentation of purchasing and production planning
- Presentation of the choice of location and legal form
- Opportunities and risks
- Financial planning
Fuer-gruender.de has provided a very comprehensive description in this article: Business Plan Introduction
A great, simple method to define all components holistically is also provided by the Business Model Canvas:
Click here for the official website https://www.strategyzer.com/
Liquidity plan vs. cash flow statement
For the sake of completeness, one should actually also add vs. cash flow calculation. Essentially, all three terms describe the same thing, namely the liquidity plan. The term cash flow statement, however, is usually used more in hindsight. For large companies, the cash flow statement is part of the annual or consolidated financial statement.
Another peculiarity compared to the liquidity plan is that the cash flow statement usually uses the indirect method to determine liquid funds. Instead of directly comparing revenues with expenditures, the differences between assets and liabilities are used to determine the amount of liquid funds.
As a "financier", I am now raving about the various definitions of indirect calculation, but I'd better leave that alone at this point. Because the cash flow statement is an ideal transition to the next topic: the template for liquidity planning.
Templates for a liquidity plan
The ideal template is the cash flow statement. Why? A template for a liquidity plan should (1) contain all elements of financial planning, (2) be transferable to accounting and (3) allow reconciliation with the bank account. In addition, the requirements in terms of temporal evaluations and maintenance of the data must be taken into account.
When US investors say, for example, that liquidity planning or the cash forecast model should be based on the profit and loss account extended by balance sheet items, they are talking about precisely this cash flow statement.
Cash flow scheme (cash flow statement)
Now we know from the finance plan that it includes a plan P&L and subsidiary accounts. We have also established that liquidity plan and cash flow statement are synonyms. It follows that the ideal template for a liquidity plan is the cash flow statement template. To be more specific, the direct determination method of the cash flow statement or cash flow statement. This is also the reason why COMMITLY uses this method.
Let us briefly examine this hypothesis: The cash flow from operating activities compares the operating income and expenses, essentially in the scheme of a profit and loss statement. In the area of income, the assumptions of the ancillary calculation of turnover planning flow in, in the area of expenditure, personnel planning. The cash flow from investment reflects the investment planning, the cash flow from financing the financing planning.
Since liquidity planning includes all incoming and outgoing payments, the liquid funds at the end of a period must also match the figures in the accounts. Essentially, this results in the following scheme:
A more detailed description of the scheme incl. categories is here apparent.
There is still the issue of requirements for temporal evaluation. Especially in liquidity planning, there is often a requirement for planning on a weekly basis. Ideally, it is therefore possible to choose between different time lines.
Templates mainly for the surplus income statement
In Austria, by the way, the surplus income statement is called the income-expenditure statement. If you Google template liquidity planning, you get over 69,000 results in 0.38 seconds. Great!
If you take a closer look at the results of the search, you will quickly realise that it is not that easy to find the right template. Here are links to some free examples:
- https://www.constanze-elter.de › 2018/03 › Kap-5_Liquiditaetsplan2
One template I would like to highlight is the Kfw - Bank mit Verantwortung template. There is also a Checklist-4 Liquidity Plan as part of the promotional offer for domestic companies. This is an editable pdf.
Essentially, these examples always use a scheme:
The disadvantage of this approach is that income and expenditure are not divided into the groups operational, investment, financing. This is important because the groups also reflect the possibilities of influence. Investments - can often be "pushed", i.e. shifted backwards in time. Financing, especially when it comes to withdrawals, can also be controlled.
Furthermore, this presentation does NOT allow statements about the monthly average income or expenditure, as these are usually made WITHOUT effects such as investments or financing. All templates have one thing in common. They are aimed at very small entrepreneurs and, in our opinion, mix up essential components.
The separation into operative incoming and outgoing payments as well as the areas of investment and financing discussed above has great advantages. The separation makes it possible to make a statement about regularly recurring cash inflows and outflows as well as about trends. Usually, jumps in incoming and outgoing payments indicate financing and investment activities.
We often hear in our conversations during onboardings: The amount of exits this month can't be right!
This is almost always the indication that, for example, a loan repayment, an investment or even a withdrawal took place in this month. The use of the cash flow statement scheme remedies this. By separating these three areas, a normalisation takes place statistically, which is the prerequisite for being able to make trend statements at all.
Here is a highly simplified example of this situation:
You know that your expenditure per month is +/- 25. In a graph you now see a value of 62 last June, but in the external view without further information this would result in an average expenditure of 40.
The mere summation of expenditures can therefore have a distorting effect. If we now split the expenditure into the groups operational and financing, the following picture emerges:
At first glance, it can be seen that expenditure increased in June due to the repayment of a loan and that operating expenditure is within the expected range.
Templates within the framework of a continuation forecast
A special case for liquidity planning is in the case of imminent insolvency. As already mentioned, the ongoing monitoring of liquidity is one of the most important tasks of the entrepreneur or managing director. The continuity forecast is described and regulated in the so-called IDW S 11, although the IDW S 11 itself does not specify a concrete template.
In the example, the liquidity plan template is expanded to include balancing or adjustment measures. This shows which operational, investment-technical or financing-technical measures the entrepreneur takes to eliminate the liquidity bottleneck (area outlined in red). Unfortunately, however, this is not clearly structured.
Source: Praxishandbuch Sanierung im Mittelstand - Chapter: The corporate crisis: types, causes, stages and analysis, Springer
I have deliberately written this in a rather complicated way to underline once again the importance of the cash flow diagram as a template with its subdivision into operating, investing and financing.
What is liquidity planning?
Liquidity planning is the activity of creating a liquidity plan. It is therefore a matter of filling a planning template with expected payment flows as receipts or payments. The terms liquidity plan and liquidity planning are often used synonymously.
Basis of liquidity planning
The most important basis for any liquidity planning is the status of the available funds, i.e. the liquidity stock. As a rule, available funds are the existing credit balance on bank accounts (bank credit) and any unused credit line. This means that the bank account and the current actual figures are at the centre of liquidity planning and not, for example, the bookkeeping.
Why not bookkeeping? Because the main task of bookkeeping is the proper mapping of the company's business transactions in a period and usually the booking of business transactions happens relatively late. Thus, in many cases, the basis or control of the bookings is the bank's turnover list.
Preparation of liquidity planning
The activity of liquidity planning can be temporally
- in the initial creation and then
- into ongoing maintenance or also rolling liquidity planning.
How often do you do liquidity planning?
Liquidity is a measure of time and means being able to meet one's payment obligations at any time, i.e. every day. It is about the development of liquidity. The preparation of liquidity planning is therefore strongly dependent on the amount of liquid funds (usually bank balances and cash in hand) in relation to the expected disposals of a company. In principle, however, the recommendation is to revise liquidity planning on a weekly basis. For liability reasons alone.
In this context, there is a very interesting and short article on the topic by the well-known US venture investor Fred Wilson: Cash Management (in Startups). I put the startup in brackets because Fred Wilson's definition of startups is very broad.
Why is liquidity planning so important?
Ensuring that sufficient liquidity is available, filling the liquidity stocks, is an entrepreneur's very own task, which should also not be delegated. It is the owner's task to assign a person to secure liquidity, i.e. to forecast the development of liquidity - or to assume this competence himself. The competence to monitor liquidity can be delegated, but the responsibility for continuity remains with the owner.
But why is that so? Because without liquidity, i.e. without liquid funds (bank balances, cash on hand or usable credit lines), companies fail. In the legal sense, this is understood as insolvency. Insolvency refers to the situation of a debtor being unable to meet its payment obligations to creditors. Insolvency regulations exist to minimise the consequences of insolvency.
Misconduct in the sense of insolvency law or even negligence in monitoring liquidity can have consequences up to and including criminal law.
So how do you do liquidity planning?
When preparing a liquidity plan, there are the following possible procedures:
- Zero base - one starts with the submission of an empty liquidity plan and enters the future payment disturbances, i.e. the expected income or expenditure
- Updating of actual figures - the actual figures (account balance + past transactions) are transferred into a liquidity plan and a linear relationship with the development of the past is assumed.
- Transfer of the figures from the finance plan - the figures from the finance plan are transferred to the liquidity plan
Procedure 2 and 3 are used in practice in combination.
From the finance plan to the liquidity plan
When reconciling the figures from the finance plan to the liquidity plan, the following things should be noted:
- Financial planning takes into account revenues and expenses and NOT outgoing or incoming payments - take into account the average payment terms of your customers or your payment behaviour for supplier invoices, i.e. how long it takes until a transaction is made on the account - in this context, one often speaks of the cash conversion cycle.
- Financial planning is done net - while liquidity planning uses gross values, as the actual payment flows on the accounts are to be forecast
- "Non-cash" items are not to be taken into account in liquidity planning - this mainly refers to write-offs
- If only a planned P&L has been prepared within the framework of financial planning, the planning horizon must be checked for investments as well as divestments.
- The same applies to financing, pay particular attention to loan repayment dates!
- Financing - Note for advanced or managing directors (who are not shareholders): Be aware of dividend payout dates. Even a dividend decided by the shareholders may NOT be paid out in case of imminent insolvency, not even on written instruction. In extreme cases, the managing director may be personally liable.
- Different consideration of periods in the finance plan and in liquidity planning. The preparation of a finance plan for the following period usually takes place at the end of a business year. The liquidity plan, however, always looks at least 6-12 months into the future. I.e. in the second half of the year it may be that no planned figures are available from the finance plan.
- Starting point: Financial planning does not need a "starting point", whereas liquidity planning is calculated from a current liquidity stock (e.g. bank balances). This is due to the fact that the result of financial planning is a period variable (profit of a period) and the result of liquidity planning is a point in time variable (liquidity on a day X).
What do you need for liquidity planning?
As shown, liquidity planning is not only the most important planning but also the easiest to prepare. You need the following information to prepare the liquidity statement:
- The current stock of liquid funds (liquidity stock). This is usually the sum of the account balances of the bank accounts (bank credit balances), but also the cash balances. Attention, do not forget e.g. Paypal credit balances here.
- Assumptions about future cash flows that will change the current level of cash and cash equivalents.
- Indicators for the assumptions in the short-term area are the open items
- A financial plan or the historical actual figures from previous periods can help to guide the assumptions in the medium term.
- The assumptions in the long-term area are based on the entrepreneurial objectives or priorities. For example, if one wants to achieve a growth in turnover, allow for higher private withdrawals, etc., one should consider the following
Ongoing maintenance or also rolling liquidity planning
By using rolling planning, you can continuously monitor the goals you originally set and - based on facts - revise them if necessary. What sounds so simple now is in practice tedious to create but above all to maintain and keep up to date.
From our point of view, two points have to be taken into account. Liquidity planning must always be kept up to date and no budgets must be "forgotten". You can always achieve up-to-date planning by assigning an employee who regularly monitors the bank accounts and brings them together in a planning tool of some kind. Be it in Excel or in your ERP.
While another approach chosen is also "I have a feeling about this", this approach is STRONGLY not recommended. The most important point, however, is that if something does happen, as a managing director you will quickly find yourself in a situation of "gross negligence" and thus in an insolvency delay (= criminal law).
And what is this about forgetting budgets?
Let's assume that you have planned a turnover of 10,000 in one month, but only 8,000 come in. The responsible employee assures them that the 2,000 will be "made up" at a later date. In a mere target/actual comparison, this information is a comment. In rolling planning, the future budget must be adjusted by the 2,000 to be made up. This applies not only to incoming payments, but especially to outgoing payments. Since liquidity planning should always be kept conservative, see also the topic of provisions in liquidity planning, in case of doubt positive deviations in payments should be carried forward to the next months. This means that it is assumed that these costs "saved" in the months will come at a later date. Ideally, these costs will not be incurred and you will have built up a liquidity reserve or "provision". And nothing is more pleasant than having a small buffer!
Special topics in liquidity planning
Value added tax in liquidity planning
The aim of liquidity planning is to map future payment flows, i.e. incoming and outgoing payments. In principle, these payments are always made gross. As a rule, the service provider owes VAT to the tax office. VAT is an annual tax with monthly or quarterly advance VAT payments. This means that these advance payments must be planned with an effect on liquidity. After the entrepreneur providing the service owes the tax, the entrepreneur receiving the service may deduct the VAT paid by him (input tax) when calculating the advance VAT payments. The VAT rates applicable in the respective countries of the EU are to be used for the calculations.
Ever wondered why some invoices say 0% VAT reverse charge?
An exception is the so-called reverse charge procedure within the EU. This leads to a reversal of the tax liability in defined cases. Haufe has presented the benefits very clearly: Reverse charge
The reverse charge procedure mainly applies to deliveries and services within the EU and depends on the place where the service is provided. De facto, this leads, for example, in the case of digital services such as Google Ads, COMMITLY, etc., to a display of 0% VAT and the corresponding reference: "Subject to the reverse charge procedure".
The correct mapping of VAT can accordingly take all forms from simple to very complex. Since complexity is the enemy of simplicity and liquidity planning should be kept as simple as possible, a pragmatic approach has emerged in practice.
It is assumed that all inputs and outputs are gross values and the advance VAT payment is taken into account for planning purposes on the basis of the past. Rough changes or fluctuations in the development of turnover and costs are estimated in the forecast.
There is a principle in planning: since the future is not predictable, always plan more conservatively, i.e. with higher costs. Perfect transition to the topic of provisions in liquidity planning.
Provisions in liquidity planning
In accounting, provisions are liabilities whose existence or amount is uncertain but which are expected with a sufficiently high degree of probability. Explicit provisions in the sense of accounting do not exist in liquidity planning. However, provisions can be formed implicitly in the following ways:
- Plan conservatively - i.e. set income rather low while expected expenditure rather high
- Since the development of the account balance within a month is also important in liquidity planning, income whose payment date is uncertain should rather be planned at the end of the month and expenses rather at the beginning of the month.
- Within the framework of rolling liquidity planning, positive deviations in a previous period can be carried over into future periods as a buffer.
Depreciation in liquidity planning
In accounting, depreciation is the recording and offsetting of reductions in the value of fixed and current assets. Reductions in value that occur due to the time of use are also referred to as depreciation for wear and tear. These are non-cash expenses (or revenues) that are not taken into account in liquidity planning.
Offsetting between several accounts or companies
A special case in financing is transfers between accounts or offsetting between companies. We are often asked how to deal with this issue when using COMMITLY. Technically, these are financings between two companies, we recommend creating a category "Offsets" in the Cash Flow from Financings section. If one wants to be precise, categories could also be created for each account or company and the transactions categorised accordingly.
Liquidity planning and cost centres
At COMMITLY, we know about cost centres from the feedback we get from our users. For this reason, I would like to address the topic here. For us, this is the difference between financial planning and liquidity planning, or their different objectives.
- Cost centres are indispensable for the control of a company above a certain size
- If you have cost centres, financial planning should also be done at this level.
- The clean mapping of cost centres requires a lot of effort in accounting (account assignment, posting, etc.).
- The primary goal of a cost centre structure in financial planning is the transparent presentation of the financial management of the cost centres, but this is primarily oriented towards the past.
- Liquidity planning is future-oriented and is intended to ensure the company's solvency at all times as well as to identify financial action requirements (positive and negative) at company level
In our opinion, liquidity planning with a cost centre structure would be absolutely excessive and would mean too much effort. In larger companies, these areas are therefore always separated.
Liquidity planning for 13 weeks?
13 weeks is considered an important period in the context of the solvency check. Keyword here is also: the forest stock forecast. If there is an insolvency, the manager must check in the 21-day plan whether the solvency can be restored in this period with a probability bordering on certainty.
However, a 21-day plan does not provide sufficient information about the further development of the company's liquidity. Rolling, detailed liquidity planning over 13 weeks has proven to be more useful. This period is usually easy to plan due to open items. The topic of forest inventory forecasting is defined in the so-called IDW S 11. IDW stands for Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany):
"With IDW S 11, the IDW publishes a standard for the assessment of insolvency, over-indebtedness and impending insolvency. Taking into account the current supreme court rulings, it also addresses controversial questions in the literature. Overall, the IDW takes a rather conservative view: According to IDW S 11, a company is insolvent if it cannot completely close even a minor liquidity gap of a few percent of the obligations due on the reporting date in the long term."
IDW: New standard for assessing insolvency maturity
You can find a very interesting article on this here: GmbH Insolvency: 7 Things Every Managing Director Should Know
How do you start liquidity planning in COMMITLY?
We were told about the following specific situation during an onboarding session:
- We use an Excel list in which all orders are recorded. (Expected Open Items or also OPOS)
- Details are: Number, supplier, gross amount, expected payment date
- 1x per week on Mondays we receive an OPOS list from the accounting department
- The list is copied to the expected OPOS list.
- The expected OPOS list is compared with the "actual" OPOS and the expected OPOS entry is manually deleted so that only the "actual" OPOS entry is available.
- Originally, the deletion was done manually, but our Excel expert then developed a macro for us to do this
- We have the same procedure for outgoing invoices
- The account balance is updated 1x per month and then everything is adjusted accordingly
- We could automate the process even further in Excel, but we do not want to build up complexity here and depend on our Excel specialists.
Against this background, a start in COMMITLY would make sense as follows: Basic Setup
- Establishment of the company, name + end of business year (Attention, please enter correctly, cannot be changed later)
- Linking the bank accounts
- If necessary, adapt the categories to the requirements of the company - Help area COMMITLY - Create categories
- Categorisation of transactions - please refer to the professional tips in the help section.
- Tip: Please note the threefold division of the cash flow calculation into operating cash flow, cash flow from investment and financing.
Result after the basic setup
- All actual figures sent by the bank are categorised. On the planning screen you can see the cash flow planning (dropdown: actual figures). The chart shows the development to the day.
- Furthermore, you can have a first report created under Reports - Help area COMMITLY - Create Reports
On this basis, you can transfer your OPOS procedure into COMMITLY
- In general, our understanding of OPOS includes "expected OPOS" - Help COMMITLY - What are open items?
- Import of expected OPOS: please note here that expected inputs are positive amounts, outputs are negative amounts. The column headings are to be chosen as mentioned in the help article. The Excel list must not contain any blank lines or formulas. Please also use only 1 spreadsheet. - Help area COMMITLY - Add open items
- After the import, you can also assign the individual entries to categories
- I would do the matching with the "actual" OPOS manually by changing the status of the entry. To change the entries, please see this post: COMMITLY Help Area - Edit Open Items
- I also have a 7 minute video on our Youtube channel on how to do these steps: Demo Open Items
Result after transfer OPOS
- In the OPOS summary, you can see the amount of receivables and payables as well as the time of occurrence graphically.
- On the planning screen, if you select "Forecast" in the drop-down menu (standard selection), you will see the development of the cash flow over the next few months (table), with day-by-day precision in the graph.
- Complete the cash flow table Forecast on the planning screen with inputs and outputs that are not transferred via the OPOS (e.g. rent, insurance, accounting, tax advice, etc.) - Tip: Planning is easy by clicking on the desired cell (category and month) and planning an amount - basic procedure here: Help area COMMITLY - Create planning
- Synchronise - by clicking on the synchronisation button, the bank account will be updated. New transactions (if any) are loaded and the account balance is updated. The new transactions must be categorised. In the background, your new assistant Wolff learns and already makes the first suggestions. This will get better and better over time.